Dirty Little Startup Secret: Barriers to entry

MY DIRTY LITTLE START-UP SECRETBARRIER-TO-ENTRY STRATEGY FOR START-UPS http://www.flickr.com/photos/sirmightymac/

when dealing with competitors

provided that you don't break the law

cheating is good

one of the best ways to cheat

is to change the rules of the game

to stack the deck

so that competitors find it harder, or more

expensive, to do the same thing as you

in b-school, we teach Cheating 101

but we call it Barriers to Entry

* From Porter’s 5 Forces if you’re looking to impress at a dinner party

ideally, you want to have low barriers to entry in any market space that

you want to enter

and then

once you are in

you immediately slap up high barriers, so that

future competitors cannot follow you

historically, start-ups have placed an over-emphasis

on intellectual property

IP gives you a government-protected

monopoly to profit from a specific solution

it is no longer free-market competition

you've changed the rules of the game

excellent cheating!

but IP is just one of dozens of barriers that a

start-up has at its disposal

and frankly, one of the weakest

let’s take a tour

BarrierSEnTry2

THE TRADING CARD GAME FOR START-UPS

INTELLECTUAL PROPERTY VULNERABILITIES

• Innovation around the patent• Reverse engineering• Shameless piracy• Prohibitive cost to enforce• Inability to protect across all

jurisdictions• Public disclosure of IP required in

registration

Leverage the government sponsored monopoly privileges that come with registering patents, trade marks, or copyrights.

Competitors are blocked from using your innovations without obtaining a license from you to do so.

BACKGROUND

COMBAT STATSDefence Strength LOWCost to Setup HIGHCost to Maintain MED

COMBAT RATING

LEGAL / GOV’T BARRIER

BarrierSEnTry2


TRADE REGULATION VULNERABILITIES

• Counter lobby• Forfeit of future growth markets

If your competitors pay an additional 15% import tax in order to sell into your market, you're cooking on gas!

Similarly, if you can help design safety regulations, subsidies, zoning, licensing procedures, subsidies or other laws such that your competitor products are disadvantaged, you are also laughing all the way to the bank.

BACKGROUND

COMBAT STATSDefence Strength MEDCost to Setup HIGHCost to Maintain MED

COMBAT RATING


BarrierSEnTry2


RECIPROCITY VULNERABILITIES

• Be especially wary of jail time• Reciprocity has a quick half-life. You

need to earn quickly and spend quickly.

In many political contexts, firms use lobbying, favours, outright bribes, or other creative means to create reciprocity debt with powerful market players. These reciprocity debt pools can be called upon when needed to address competitors in creative ways.

BACKGROUND

COMBAT STATSDefence Strength HIGHCost to Setup HIGHCost to Maintain MED

COMBAT RATING


BarrierSEnTry2


CONTROL RAW MATERIALS VULNERABILITIES

• Competitor innovates an equivalent product from different raw material

• Suppliers break their contract with you• Government intervention (anti-

competition law)

If you can control the raw materials required for production, you control the competitive landscape.

For example, if the product absolutely requires Mangosteen extract to work, and you have 10-year exclusive contracts with 86% of the world's Mangosteen farmers, then your competitors won't be able to manufacture the product, as they simply won't be able to purchase raw material

BACKGROUND


COMBAT RATING

SUPPLY CHAIN BARRIER

BarrierSEnTry2


CONTROL TALENT VULNERABILITIES

• Spin out start-ups• Someone always can pay more or give

better perks• High-flyers often don't get a long• There are always new PhD's that put

your PhD's to shame

This is like control of raw materials, but specific to knowledge industries like high-tech, banking or pharma.

In this case, you hire all the PhD's in the market so that competitors don't have access to the specific brain power.

Then you comp them well and use bonus payments, equity, patenting support, etc to keep them locked-in

BACKGROUND

COMBAT STATSDefence Strength LOWCost to Setup MEDCost to Maintain MED

COMBAT RATING

SUPPLY CHAIN BARRIER

BarrierSEnTry2


COST OF PRODUCTION VULNERABILITIES

• Once you drop your price, you may not be able to raise it again – you may win the war, but what you win is a no margin market.

• Niche or Blue Ocean Strategies• Production / Manufacturing

Innovation

When you are big, and spending big wads of cash, your costs go down. For example, you get discounts for bulk ordering.

With a reduced cost model, you can drop your price below what smaller competitors can sustain.

You can also leverage specialized know-how (which requires high cost/long time to duplicate) or favourable geographical location to reduce cost.

BACKGROUND

COMBAT STATSDefence Strength MEDCost to Setup HIGHCost to Maintain MED

COMBAT RATING

MANUFACTURING BARRIER

BarrierSEnTry2


CONTROL MANUFACTURING VULNERABILITIES

• Primarily works only for specialized (non commoditized) manufacturing processes

• Easy to have facilities break ranks unless they are well locked-in by contract or otherwise

The idea here is to control all the factories that make your widget or you control the technology required to manufacture it.

BACKGROUND

COMBAT STATSDefence Strength MEDCost to Setup MEDCost to Maintain MED

COMBAT RATING


BarrierSEnTry2


SUNK COSTS VULNERABILITIES

• Competitors may not always be rational

If the manufacturing process requires expensive start-up costs and because of the nature of production, those assets can not be redeployed to some other production process, then entrants will be wary to invest because they may end up losing big.

BACKGROUND

COMBAT STATSDefence Strength LOWCost to Setup HIGHCost to Maintain MED

COMBAT RATING


BarrierSEnTry2


CONTROL RETAIL REAL ESTATE VULNERABILITIES

• E-Commerce• Multi-level Marketing• Channel margin war

Why are there so many versions of Colgate on the shelf at your supermarket? It is not because they actually have that many distinct client segments.

It is so that they can pack the limited shelf-space. If their competitors have no shelves upon which to display their products, nobody will be able to buy them.

If you own shelf space your competitor is blocked.

BACKGROUND


COMBAT RATING

DISTRIBUTION BARRIER

BarrierSEnTry2


CLIENT LOCK-IN: BRAND LOYALTY VULNERABILITIES

• Brain rewashing• It’s hard to brainwash in the first place

Brainwashing is great. With brand loyalty lock-in, you convince your customers that their very sense of self (self image or personal brand) depends on your product.

Without your product, or with another product, they are just sneetches without belly stars.

BACKGROUND

COMBAT STATSDefence Strength HIGHCost to Setup MEDCost to Maintain MED

COMBAT RATING

CUSTOMER BARRIER

BarrierSEnTry2


CLIENT LOCK-IN: TYING VULNERABILITIES

• Anti-competition laws• Need a pretty powerful product Y

Tying happens when you force a customer to buy Product X if they buy Product Y. If Product Y is good enough, it locks in Product Y.

BACKGROUND

COMBAT STATSDefence Strength LOWCost to Setup HIGHCost to Maintain LOW

COMBAT RATING

CUSTOMER BARRIER

BarrierSEnTry2


CLIENT LOCK-IN: SWITCHING COSTS VULNERABILITIES

• Adaptors• Signing “buy-out” bonuses

Make it financial difficult for a customer who has already purchased your product to switch to another one:• Phone number portability• Standards incompatibility &

proprietary formats/APIs• Warranty on the whole, not the parts• Points & rewards programs• All or nothing service agreements• Licensing terms

BACKGROUND

COMBAT STATSDefence Strength HIGHCost to Setup LOWCost to Maintain LOW

COMBAT RATING

CUSTOMER BARRIER

BarrierSEnTry2


NETWORK EFFECTS VULNERABILITIES

• Susceptibility to trend setters and new networks (Facebook vs MySpace)

A network effect occurs when customers gain more value as more customers buy. Once a network reaches critical mass, it is hard for a customer to leave the network unless all the other customers move too.

BACKGROUND

COMBAT STATSDefence Strength HIGHCost to Setup MEDCost to Maintain LOW

COMBAT RATING

CUSTOMER BARRIER

BarrierSEnTry2


PSYCHE WARFARE: VAPOURWARE VULNERABILITIES

• Clients may eventually see what you are doing

• Lead users may still buy if they are too excited to wait

You are a small start-up that has come up with a cool new software product for enterprises. Microsoft sees it and thinks that it is a good idea, but it will take them 2 years to build, or they don't want to build it & just want to squish you like a bug so that the tech is killed in the womb.

They announce that the feature will be supported in the next version of Windows. Lies, damn lies, statistics….and marketing.

Will clients buy from you, or wait for MS?

BACKGROUND

COMBAT STATSDefence Strength MEDCost to Setup LOWCost to Maintain LOW

COMBAT RATING

GENERAL BARRIER

BarrierSEnTry2


PSYCHE WARFARE: RETRIBUTION VULNERABILITIES

• You have to always win• New punks with no memory will come

eventually

Nobody wants to enter a bloody, embarrassing battle (price or marketing war). If you respond to the first few competitors quickly, harshly, and with deadly force, you'll develop a reputation for retribution. Competitors will have learned not to mess with you and will self-divert to another market without you actually doing anything

BACKGROUND

COMBAT STATSDefence Strength MEDCost to Setup HIGHCost to Maintain HIGH

COMBAT RATING

GENERAL BARRIER

BarrierSEnTry2


INNOVATIVE SPEED VULNERABILITIES

• Actually, you don't have the only smart team

• The weight of operations will slow you down in practice

• Talent poaching• Key-man risk• Burn out

Just innovate faster than your competitors. You know, whip those engineers until they bleed!!!

BACKGROUND

COMBAT STATSDefence Strength LOWCost to Setup MEDCost to Maintain MED

COMBAT RATING

GENERAL BARRIER

BarrierSEnTry2


WAR CHEST VULNERABILITIES

• Fight fire with fire – clash of the titansJust out spend! Having a big war chest is its own barrier. You can just spend more on everything – Marketing, R&D, Manufacturing Infrastructure

BACKGROUND

COMBAT STATSDefence Strength MEDCost to Setup HIGHCost to Maintain HIGH

COMBAT RATING

GENERAL BARRIER

BarrierSEnTry2


CARTELS & EXCLUSIVE DEALING VULNERABILITIES

• Anti-competition lawJoin together independent business organizations to regulate production, pricing, and marketing of goods by the members.

This can occur either vertically or horizontally.

BACKGROUND

COMBAT STATSDefence Strength HIGHCost to Setup LOWCost to Maintain MED

COMBAT RATING

GENERAL BARRIER

ok, that’s my list so far

if you've got a sneaky trick to play on a

competitor, please email it to me so that I can add it

thanks for reading this far!

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Dirty Little Startup Secret: Barriers to entry

Business

Transcript of Dirty Little Startup Secret: Barriers to entry