When you’ve identified a genuine gap in the market and developed a clever product to fill it, growth can come very quickly and the possibilities may seem limitless. But it might only be a matter of time before a bigger company with deeper pockets arrives and entrepreneurs can soon find that stellar growth quickly becomes a fight for survival.
One company that faced this issue is findmypast.co.uk, which was launched by probate research company Title Research and virtually invented online genealogy for amateurs in Britain. In its first year it generated more profit than the company that founded it. But the success soon attracted established US player ancestry.com, which had greater resources. Title Research found itself under siege and sold findmypast.co.uk within two years. Unlike many though, the story has a happy ending and the site has since reasserted itself.
Dr Ben Spigel, Chancellor’s Fellow and lecturer in Entrepreneurship at the University of Edinburgh Business School, says: “It’s really important to realise that first mover advantage doesn’t count for much. Just because you were the first in this market, and you were the first to identify it, isn’t going to get you very far even if you have pretty good brand recognition. Once the 800lb gorilla comes in, it’s going to be very difficult. Don’t assume customers will be loyal.”
Smaller companies are at a disadvantage in this situation because they don’t have the same resources, access to market or numbers of staff as the new arrival, adds Dr Spigel. And patents, trademarks and brand recognition can count for very little. While a patent allows you to file a lawsuit, there is no small business in the world that can handle a lawsuit against a major company, he says.
The one advantage that smaller companies do have is flexibility and the companies that survive and thrive in this situation are those that are flexible in the way they approach the problem. A smaller company can say, for example, ‘we’re going to focus just on start-ups’, or ‘we’re going to focus on students and professional users’. They can then really customise the product to meet those customers’ needs because they can survive without selling to the mass market.
“This is where a lot of companies fall down,” says Dr Spigel. “They don’t realise that when you have a big competitor come into your space you can’t serve the mass market. You’ve really got to focus on a niche. You really want to focus on quality of service, and the quality of the product versus having something that appeals to everyone.”
Another option for dealing with the arrival of an 800lb gorilla is to sell your business to them, says Dr Spigel. Offering your company as a strategic acquisition to your competitor can be a very good exit strategy. It may be much easier for them to buy an existing product, intellectual property, brand recognition and an existing user base than trying to create it all from scratch.
“You should never see this as having to compete. There’s always an option to speak with them and make this a win-win for both of you,” he explains.
Dr Spigel says there will always be cases when there is no good way forward. “For instance, Amazon is very famous for identifying categories that they could win in and that are very profitable for them and then just introducing their own product and undercutting the competition. In those cases, there’s not a lot you can do. It’s about move on to the next thing.”
But for many entrepreneurs, simply being flexible and developing a business strategy to take the new competition into account can keep them on a profitable growth path.