Entrepreneurs commonly underestimate the impact of competition. Entrepreneurs who do underestimate the impact of competition are failing to consider the fact that potential buyers are currently managing without the entrepreneur’s product. There are three arguments for why potential buyers are managing without the entrepreneur’s product or service:
- parallel products exist in the market
- reasonable substitutes exist in the market
- parallel products and substitutes do not exist, but the public does not perceive, or is not aware, of the benefits offered by the entrepreneur’s product or service
Parallel products are those that are functionally interchangeable with the entrepreneur’s products, but vary just enough on the product’s perceived benefits to exist in the marketplace. For example, many communities have areas where a number of restaurants exist in close proximity to one another. These restaurants all offer the customer a prepared meal, but may vary as to nationality or type of cuisine, complexity and originality of preparation, level of service, seating, and other dimensions for which the buying public perceives a benefit.
An entrepreneur opening a new restaurant in proximity to existing restaurants may be offering a heretofore unavailable national cuisine, but the entrepreneur still has many competitors. In this market of parallel competitors, the entrepreneur will be successful only if buyers perceive that the new restaurant offers desirable benefits that are unavailable from existing restaurants. The new restaurant must generate enough sales to generate a profit. In reality, what often happens is that the new restaurant will initially generate a strong trade as buyers try the restaurant’s novel offerings. However, in a few months the new restaurant will fail unless it has found the means of offering a mix of perceived benefits not available in competing restaurants. This suggests that the entrepreneur must learn enough about what buyers or customers need or want and enough about how competitors are attempting to meet those needs, that the entrepreneur can offer enough perceived benefits to keep customers returning indefinitely. Learning about buyers and competitors is the role of competitive intelligence.
Substitutes often exist for the entrepreneur’s product. Substitutes are products that fill the same function but originate in different industries. Buyers may have a preference for a substitute due to the substitute’s greater perceived benefit. For example, the basic construction material for houses varies greatly on a geographic basis. Wood housing tends to be favored where wood is abundant and relatively inexpensive, and a similar argument can be made for the wood substitutes, brick and stone. The entrepreneur is unlikely to be more than marginally successful if s/he attempts to sell bricks where wood remains abundant and cheap. S/he may be marginally successful because wood housing often has brick fixtures and trim. However, in a market where wood is becoming more costly due to a lack of abundance, brick may become an attractive substitute for wood. Understanding substitutes place in the market is the role of competitive intelligence.
Perhaps the most difficult situation for an entrepreneur exists where there currently exists no functionally interchangeable product. It may appear that a complete lack of competition would be to the entrepreneur’s advantage, but this is seldom the case. In those instances where firms offering similar products can be found in other markets, the most likely explanation for a lack of competitors is a market that will not sustain the firm. The market may be too small, or too seasonal, or the customer demographic may be skewed, etc. The entrepreneur should proceed cautiously when a superficial inspection suggests a potential market lacking an established competitor. A more thorough investigation will often reveal failed attempts to establish a market for the product. This investigation is one of the roles of competitive intelligence.
In the rare instance where the entrepreneur has discovered or invented a unique product, s/he typically faces a truly daunting task. Potential buyers must be educated as to the existence and benefit of the new product. Educating buyers and establishing a market for a new product is expensive. Unfortunately for the entrepreneur, it is often the follow-on firms that are successful. In the electronics industry, the originators of the personal computer, video game console, and personal data assistant provided the infrastructure for successful follow-on firms, but were unable to capitalize on their own innovative products.