RL98: Competition vs Co-opetition

Keep your friends close, but your competitors closer

Competition is a critical factor in business and startups.

When a company identifies a lucrative market with an underserved need, others will take note of the new market and seek to capture a portion of the market share.

This week’s post is about competition -

• The factors that determine how competitive an industry will be

• The nature of competition in different markets

• How startup founders should think about competition in market selection

• Critical rules for interacting with competitors

Let’s dive in -

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Factors that Determine Competition

It seems obvious that all businesses face competition, but in truth, market forces determine how competitive an industry or market will be.

Let’s take a simple example:

1. There are many coffee companies - roasters, cafes, homebrew systems - each of these segments of the coffee market faces intense competition for customers.

2. There are very few social media platforms for business professionals—only one. LinkedIn competes with other social media giants but has a stable niche with limited threat of new entrants.

3. The aircraft production business has limited competition - Boeing, Airbus, Lockheed, and Gulfstream.

Why is that?

Market dynamics determine competitive forces.

The dynamics of a market determine how many companies can exist in that vertical. Here are a few of the market dynamics that impact competition -

• Number & purchasing power of buyers - there are billions of coffee buyers, whereas there are very few purchasers of aircraft

• Network effects - some businesses get more valuable as additional users join the platform. Examples include telephone networks (a network with 10 people is more valuable than a network with 2) and social media networks (Instagram is useless if none of my friends are on it).

• Supply - there are more suppliers of coffee beans than there are of unique metals or minerals.

• Regulation - there are specific government regulations that create natural monopolies. Some of these are by design - patent laws exist and are enforced in the pharmaceutical space to ensure companies spend large amounts of money on R&D.

• Capital intensity of the business - some industries require massive investments to start new businesses. This is why there are few aircraft manufacturers - it’s really expensive to get started.

Understanding the market forces that influence competition is important, but only part of the conversation.

In the remainder of this post, we’ll explore -

1. How startup founders should think about competition in a market before entry

2. How to interact with competitors

   1. Competition vs Co-opetition

   2. Actionable advice for meeting with and dealing with competitors

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Market Selection & The Role of Competition

When deciding to launch a business, it’s critical to consider competition.

What we want to target is a market that has -