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How can small businesses & startups compete successfully with larger businesses?

When a startup or an established company creates a new technology product, they face a dilemma. If the product is innovative and has high potential, then large technology companies such as Amazon, Google, Facebook, and Microsoft might copy it. These companies have a lot of money, technology, data, and talent, so they can replicate and improve any new innovation that is not protected by intellectual property rights, and that covers most digital products.

Copying features

Copycat behavior is common and can be life-threatening to startups. Tech giants sometimes copy innovative features. For example, when Snapchat did well with stories that disappeared after 24 hours, Facebook retaliated by introducing the same feature to its products, including Instagram and WhatsApp. As a result, Snapchat’s users stalled. It has had trouble regaining their advantage and the stock price also went down.

Copying entire businesses

In other cases, entire businesses have been copied.After years of growing its user base at a fast rate, Slack’s adoption rate has slowed down. This might be because Microsoft released a product that is similar to Slack. Microsoft saw that other companies were successful with a certain product, so it copied the product and later integrated it into its other products.

Copying niche products

A third way to compete is to copy a niche product. Allbirds did this by developing a line of wool shoes that were sourced in an environmentally responsible manner. In response, Amazon copied the top-selling product and sold it online for nearly half the price.

Even though there are some companies that behave badly and this makes some venture capitalists not want to invest, some startups have survived and are doing well. They are as big as the tech giants.

At first, it may have looked like they succeeded because of luck or because Big Tech wasn’t interested. But really, these challengers used the companies’ strengths against them. This counterintuitive strategy can lead to copy-proof innovation.

Examples of companies that competed successfully against large companies

Wayfair is the largest online seller of home goods and furniture. Back in 2014, the company had just merged more than 200 niche product websites into the Wayfair brand. It was clear that Amazon was a constant threat. Wayfair has implemented features of Amazon. Amazon developers have copied features from Wayfair as well.

One thing that Amazon did not do was take its own pictures of and measurements for the furniture and home furnishings it sold. This was something that worked very well for Wayfair.

Adding this extra detail helped consumers better visualize the home decor they were planning and also helped Wayfair to stand out from the competition. (Its five-year revenue growth has been an astounding 49% [CAGR], compared to Amazon’s 26%.) However, Amazon continued to only show pictures provided by the manufacturer.

Amazon has a lot of products for sale, but Wayfair offers more products. Amazon would need to take pictures of all their products if they want them to look different than Wayfair’s products. This would be a lot of work and it’s expensive too. More than half of Amazon’s sales come from products that other people sell on Amazon.

It’s not just about the costs. Wayfair’s approach also requires longer lead times for adding new products, which would slow down Amazon’s growth. Additionally, a website with more products would load slower and be more visually cluttered. Amazon could have copied Wayfair, but it chose not to do so.

Zulily, which sells women’s and children’s clothing online, found a different way to compete with Amazon.

Amazon is a customer-centric company. This means that they focus on the needs of their customers. Customers usually get lower prices, faster delivery times, and great customer service from Amazon. However, in order to do this, Amazon’s suppliers have to put up with a lot. Amazon routinely doesn’t pay their suppliers on time and sometimes they even copy the suppliers’ products, undercuts them, and often put them out of business.

Zulily offered high-quality service to their suppliers, which made them more likely to commit to buying large quantities of products. In return, Zulily offered fair prices for the products. As a result, many suppliers decided to work with Zulily instead of Amazon.

This allowed Zulily to offer novel and unique items not available elsewhere. The company grew revenues tremendously from 2009 to 2014 at a 161% rate, until it was acquired by Qurate in 2015 for $2.4 billion.

Dropbox when it first started, made use of Microsoft’s big sales power for enterprise software.

Dropbox was a small startup for many years. It had only a few dozen employees and no salesforce to sell cloud storage to enterprise CIOs and CTOs. Instead, Dropbox offered its service for free to individual consumers. As people adopted the service and it grew, Dropbox got this network of people to start using its product at work.

People who use Dropbox for their personal needs asked their bosses to buy the service so they could use it for work.

When TikTok offered a video-sharing app that allowed users to share music snippets, it appealed to younger users who thought Facebook was for their parents and grandparents. So Facebook launched a nearly identical stand-alone app called Lasso, but it has not gained traction yet.

This judo-like approach, in which a smaller challenger uses the opponent’s size and strength to its advantage, is promising.

Ansoff Matrix

The winning formula

In order to use Big Tech’s strengths against them and avoid being copied, you will need to answer these questions:

  • What is the major strength of the opponent that is responsible for its success?
  • Can you identify a product offering (niche, feature, or format) that a segment of customers value but the opponent’s strength makes delivery of that value hard?
  • Would copying the novel offering hurt the larger opponent’s main business?
  • If the product offering eventually becomes successful, would the Big Tech opponent necessarily need to give up its strength to copy or compete?

If you can answer “yes” to these questions, then you may have found a way to stop people from copying your work. But remember, no one strategy can last forever. In order to keep succeeding, you need to keep creating copy-proof innovation.

 

David vs Goliath

An option for Big Tech is to try and acquire the threat. But this is not always successful, and it can be very costly.

Facebook tried to buy Snapchat, but the startup’s founders and investors refused. Microsoft also tried to buy Slack, but they were unsuccessful. Amazon is known for not making a lot of acquisitions, and they usually prefer to develop new products in-house.

On the contrary, Google & Facebook make a lot of acquisitions in order to stay relevant. When companies like Facebook start losing users to apps like TikTok & Snapchat, shareholders worry.

When big companies build new products for new markets, they take a diversification strategy. The diversification strategy is usually the riskiest thing to do. This is because you need to develop new products and find new markets. Since it’s hard to pull off this strategy, most companies refrain from doing so and as a result, die when a new product is in the market that starts slowly targeting a more unattractive market but then ends up capturing the entire market.

Let’s take an example of how Blackberry lost out to Apple and the iPhone.

  • The Blackberry phones were expensive and their customers were corporate executives.
  • Apple launched the iPhone with a touch screen and many features that would attract younger folks with a much more attractive price compared to the Blackberry.
  • The touch-based interface + the ability to download many apps from the app store + features like camera and music player drove crowds to buy the iPhone. As more people started buying the iPhone, Blackberry users also shifted to the iPhone because it was a cheaper alternative. The iPhone looked cooler than the Blackberry and was easier to use. Most importantly, the iPhone could do all the things the Blackberry user needed and more.
  • For Blackberry to copy the iPhone would mean sacrificing its existing customer base and building a new product. In other words, building a new product for a new market carried huge risks. So instead, they watched as Apple took over the smartphone market.
    An interesting question that big companies should ask themselves is:

“If my product ceases to exist tomorrow, will my customers feel sad?”

If the answer is no, they should be thinking about the next plan of action. When Facebook started losing users to competing apps like Snap, Instagram & Whatsapp, they acquired Instagram & Whatsapp.

For young and new companies, the question they should be asking is:

“What can I build that will make my customers’ jaws drop in awe?”

And once there is an answer to the question, it’s time to slay Goliath.

 

A great book to read further on this topic is “The Innovator’s Dilemma” by Clayton Christensen. If you enjoyed reading this post, here are some of our posts on building startups.

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