Avoiding The “Netscape Moment”

By Nilofer Merchant November 06, 2007

Competition in the technology industry is fundamental. Without it, we would never have seen the innovations and incredibly cool stuff that have informed, transformed, and improved our daily lives. Think about search engines and how often we use them to find anything, anytime. Or email tools that allow us to connect and exchange ideas with one another. Or blogging that enables the creation of valuable ideas. Or—well, you get my point.

We want that process to continue to raise both the caliber of what is created and the value it offers. But there’s a caveat that goes along with the process: When there’s a winner, there’s also a loser.

Several companies are facing their “Netscape Moment.” No, not the “everyone who matters wants to work here, and we’re making $1 million for each day we show up to work” kind of business insanity. I’m talking about the day Microsoft announced it would enter the category. Netscape never recovered. It lost its mojo—and, along with it, the market it created.

Four things that drive competitive play

There are just a few things that inevitably create competitive dynamics. These are the things that make a company say, “Yum, that looks good enough to eat!”

  • Viability of the market. Is the opportunity big enough for me and my band of investors to make lots and lots of money? Almost any company in the social networking space today will answer “yes” to this question. But the point is, everyone wants to answer “yes”—regardless of the market.
  • Completeness of the solution. Is there an underserved piece of the environment? For example, when Shutterfly launched, it wasn’t planning to beat out Adobe’s Photoshop with its built-in editing solution. It just made sense for Shutterfly’s solution, and thus the company integrated editing into what it was building.
  • Pricing-value mix. Can I do it cheaper and provide better value? There was a time when computing technology was a couple thousand dollars. Now it’s possible to own a $500 Dell computer. That’s what makes a market viable: operational and technical efficiency.
  • Customer gaps. Is the customer pain still unresolved? Technology innovators can sometimes see what others can’t—it’s the vision thing. They can design something and solve a problem that a customer isn’t even aware exists—until the customer uses the software that solves it. Consider how many thousands of phone designs existed before the iPhone.

These opportunities are what make a market attractive enough to enter. Then the challenge begins.

Some think that once a bigger competitor enters the space, it’s just a matter of time before the death knell sounds. I think the opposite is true, because there are competitive rules that create wins and others that result in abdicating the market to the new entrant.

The rules to win

To develop an effective competitive plan, you must understand the four types of swords you have in your armory—then figure out which one applies to your situation. They include:

  1. Differentiate your offer. Successful firms must differentiate their product from all other products in the market. Differentiation is possible on the basis of five fundamental factors:
    • What it does (function)
    • How fast/cool it is (utility)
    • Being able to use it exactly when you need it (convenience/elegance of use)
    • Price
    • Perception
    These five elements can be mixed into an almost infinite variety of patterns. Keep your eye on out-innovating and adding value.

    Autodesk is a technology vendor that has done this well. The company was starting to lose market share and mindshare to low-end vendors and a big vendor named Microsoft.

    What it did was two-fold: First, it created a low-end offer that matched the competition point-for-point; second, it innovated toward high-end vertical solutions that added much more customer benefit than it had before. This kind of product evolution provides great armor against attacks.

  2. Create customer loyalists. Notice that I didn’t start with having a better product. Making a better widget isn’t a competitive strategy. But having crazy, love-like affinity between you and your customers is. Do you think that many vendors can come between Apple and their Mac users? No, of course not. I take a tremendous amount of teasing for wanting to use my Mac and only my Mac. But it helps me work faster, I’m synced with the intuitive interface, and I have fewer “down” moments than my colleagues who use PCs. That kind of customer passion allows a defensive posture that is priceless. In the technology field, sooner or later you will be attacked by a competitor. Don’t get caught in a fantasy that they won’t attack. Make sure that your customers are so in love with your company and your products that the enemy can’t attack.

    How? Here are a few ways: Be generous, resonate with your customers, be inclusive, and delight and educate people. Generosity is much like love: The more you give, the more you receive. Customers like being known and having their likes (and dislikes) noted; that tells them you’re resonating with them. People like sharing their favorite ice cream flavor or making a comment on a book they bought, so be inclusive and let them have their say. Delighting customers can mean simple appreciation. And what customer doesn’t appreciate a business that provides him or her with the knowledge needed to navigate a too-busy life?

    A good example of a company with strong customer affinity (considering a seemingly inconsequential software market) is Intuit. Microsoft tried to buy the company, then entered the financial software space. The extremely strong, loyal user base was one of Intuit’s biggest assets in that war. When AOL was trying to win the dial-up market, it was extremely aggressive with promotional CD mailers. Someone at the company could have pointed out that there wasn’t a person who didn’t know AOL existed. But it was the relentless pursuit of each and every customer, repeatedly, that made AOL the dominant leader of its space and also made the company very difficult to displace.

    Lest this come across as a “hug your customers” thing, let’s be clear: Don’t love ’em—build an affinity so you know exactly what they need. Don’t just give away everything they need; be a champion for services and products that match the needs customers know they have, as well as those they don’t yet know they have.

  3. Establish the right competitive barriers. Traditional barriers to competition, as defined by economists, are of little value in the technology space. These conventional techniques are mostly designed to prevent market entry and tend not to work in a technology-based business. The most effective competitive barriers in technology are the perceptions held by customers, prospects, and those involved in the supporting infrastructure.

    VMWare is facing that situation today. It has virtually created (pun intended) the virtualization category, yet the company has done it in such a way that no one is inclined to create more market momentum in that direction. VMWare has also created the category—without ensuring the company is the rightful beneficiary of the category growth. This, while notable and worthy in the category of innovation, is like spending money to water the neighbors’ yard and not your own. It makes the neighborhood look good, but it doesn’t build value in your own real estate.

    To overcome this challenge, you need to become a brand bulldog. Pick your turf carefully, and then defend it with the tenacity of a junkyard dog guarding his bone. Forget about parity and go for distinction. Get clear on your brand position and ensure everyone in your company knows it and can articulate it. Also ensure that however you define your offer, it is truly unique. With that, you can lay claim to it, and you have a different way to fight. Customers want you to articulate why they need to follow you.

    Regarding vision, don’t leave things unchallenged, don’t be a target for the bully, and give customers and advocates a view that includes why they should choose you. The absence of your voice on the podium leaves a vacuum. Don’t let that happen. Fill the auditorium with the sound of your vision and direction. Don’t wait until you have your product management team in place. Vision is vision because few people have it. The only way to develop vision is to force yourself to articulate and develop it.

  4. Find new users. Sometimes the best defense isn’t defending at all; it’s finding ways to grow the market. If your customers are still early in the adoption curve, especially if there are new segments you can open up, it’s usually more cost-effective for you to bring in new users than it is to defend every inch of the turf you hold today.

    This concept stands traditional industry wisdom on its head. It’s supposed to always be cheaper to keep an existing customer than to get a new one. But think about it—if your market isn’t already flooded with competitors, a new entrant can usually get 10% market share just by showing up and being different. You should always defend the core of your market, but that 10% at the fringe can be too expensive to keep. If you made the same investment in a new part of the market where there’s no competition, you might be able to grow in the new area faster than you lose customers in the current segment.

    This means that, before you can decide what to do about a new competitor, understand where you are on the demand curve. If your market is close to saturation, there’s no alternative to hunkering down and fighting an all-out defensive battle. But if you’re not saturated, driving new growth may well be the best option.

    Finding out where you are on the demand curve is a lot trickier than most people think. Marketing theory says that market growth is supposed to go through an S-curve, with a slow takeoff, followed by rapid growth, then declining growth as the market saturates. If you grew rapidly last year, you’re probably in the steep part of the curve. If growth has started to slow down, you’re probably approaching saturation. Unfortunately, real-world market growth usually moves in fits and starts. It’s hard to tell whether you’re close to saturation. Alcatel Lucent has been facing this battle for the last few years, and it continues to hold on strongly to the old market and old customer sets, while refusing to invest in driving the growth of a new cash cow.

All this is motherhood and apple pie, isn’t it?

Competition is healthy. I praise its results. I offer all of this discussion as a way of encouraging better competition. I want to see the development of services and products of such value to consumers and businesses that everyone gains. Maybe with that kind of competition, companies like Apple, Nokia, and Google will bypass the wireless companies and get their best products to market.
These suggestions to find new customers, differentiate your offer, create customer loyalists, and establish the right competitive barriers might seem like “motherhood and apple pie” statements, which any of a thousand business books could provide. The question really is: What are the tools to win regardless of the situation?

Competitive advantage starts with the right approach

All this suggests that being competitive is a matter of doing a specific set of “right things.” I disagree. So would C.K. Prahalad, professor of strategy at the University of Michigan. In an article in BusinessWeek magazine, Prahalad was quoted as saying, “Whatever advantage you have, someone will take it away from you.” Andrew S. Grove articulated a similar premise in his book Only the Paranoid Survive.

Competitive advantage doesn’t come from a checklist; it all starts with an approach:

  • Be the one for the one. Uniqueness is a lost art—with companies such as Gap and Abercrombie & Fitch turning out mass-produced clothing. But there’s a reason why Whole Foods can compete with Safeway or Apple can win against Dell. Companies have to pilot like crazy. Experimentation has gotten a bum rap. Established software companies often balk at creating web applications because they’re not sure how they’ll make money in that world. Real web applications companies don’t let that stop them. They know that the industry is still in its infancy, and you can’t figure out the revenue model until you dig in and try things.

    So get started, and run a series of experiments that will tell you where you can make money. You may find that it’ll be a mix of advertising, professional services, support fees, charging for premium applications and services, and commissions for people who sell products and services through you. As long as you keep your expenses low (like web applications companies do), you’ll be able to afford these experiments. Then pour on the resources when you find the right mix. Run the businesses side-by-side.

    That’s my strong advice. Now that you’re actively developing the Web 2.0 version of your company, defend your existing applications’ franchise for as long as you can. That means focusing on the functionality that’s hard to implement using web applications tools—and keeping your core customers buying upgrades for as long as possible. Your goal is to make sure that as your users get cannibalized by the web applications world, they get cannibalized by you rather than someone else. You’re not trying to dramatically increase the rate of cannibalization. In practical terms, this means you shouldn’t artificially constrain either your web applications team or your traditional applications team. But you should assign the traditional applications team the goal of generating profit, while the web applications group pursues user growth, API adoption, and alliance building.

  • Find something new. It’s easy to sit back and think you’ve done all you can. But if you love what you do, you have to be thinking: What else is there? Is it what Cirque Du Soleil did 23 years ago when it combined circus with theater? Or what 3M did with Post-its 20+ years ago? Maybe those examples sound simplistic, but it took vision to see a sticky piece of paper as a market. Don’t be like Netflix: The company knew Blockbuster was entering its market two or three years ago, but kept thinking that it could do online delivery and leave the DVD/shipping business to its competition. When the market didn’t mature fast enough, Netflix started to look like a big bull’s eye—not an innovator and not a company with thousands of customer loyalists.

  • Forget the “me-too” innovation model. I’ve seen too many product managers get the competitive products at a tradeshow or via a download, make a list of key features, then submit that list to their engineers. No one—and I’m serious, no one—wins using this model. The thing with value chains is that they’re always morphing. What creates power in one market over time becomes an Achilles heel as some new cultural, technological, or leadership change shifts things. What is hard to know is how the value chain is changing right now, while you’re in the midst of change, rather than seeing it in hindsight.

  • Create an Etch A Sketch. If it’s old, it’s old. If it’s the next new thing, figure it out. One of our clients had a product that was a long-standing market leader. Company executives wanted to invest more money in marketing. My question was, “Why?” It was clear that the product had already won 70% of the category. Spending additional dollars to get the remaining 30% was probably a wasteful exercise. There were rumors that the product was getting long in the tooth, maybe even over-designed and bloated. Why not move to a business model that harvests the old, then do an Etch A Sketch moment: Shake it up and start over. Surround your fort. Nokia has its flanks for suppliers and networks. Apple and eBay do, too. It’s called an ecosystem. Success in the web applications world isn’t just about setting an application standard that other web applications embrace. For example, Google Maps is a nice service, but is also being widely adopted by other web applications that need to display maps. By sharing this way, Google cuts off competitors and gets free advertising. What core functions should you try to own on every other website? Build those functions, make sure your brand is visible within them, and expose APIs so other companies can use them.

  • Purple, banded collars. People like the convenience of mass production, but long for the recognition of their uniqueness. The kid who wears a different color high-top Converse old-school basketball shoe on each foot wants her or his singular style noticed. People are crossing consumption boundaries in multiple ways. Your neighbor who is obsessive about his lawn may also be into cashmere sweaters, ride-on lawn mowers, books about China, Cuban cigars, bespoke suits, and the Oakland Raiders. Claire, the senior citizen down the street, drinks Brazilian caiparinhas, hikes at least three miles every weekend, is a member of a romance book club, and wears J. Jill clothing. What we thought we knew about others by looking, we now know we don’t know at all. People have differing, sometimes conflicting, tastes. What about the 16-year-old sophisticate who’ll be accepted by Harvard, lives in Seattle, and whose favorite singer is Reba McEntire?

We need to see what customers are really like. Provide the kind of experience, information, services, and products they want. The more detail and depth we give to the individual, the more we can provide highly efficient customer segmentation, instead of depending on product differentiation. This is a shift in our thinking and behavior—and an entirely different way to create viable business and market strategies.

An interactive web platform encourages co-creation with customers and enables conversations. Let the context help drive their experience. Treat users differently than non-users. Cultivate that highly desirable influencer. Your individual customer can reach millions; respect them for it.

Underlying all these things to do is to believe. Believe in your customer, believe in the opportunity you have, and believe in your team’s ability to invent and serve. Your belief and ability can change the world.


How competitive is your firm?

1. Personal leadership
A) I eat nails for breakfast!
B) I want a promotion, and I’m focused on being named vice president next.
C) May I have some oatmeal, please?

2. Customer advocacy
A) Every customer lost is a sad, sad event.
B) My normal churn would happen, but just as many new customers would join because we treat them right.
C) Customers? What customers?

3. Our product has stayed innovative
A) We’ve hired every innovator in the area, and we enable them to create new markets for us.
B) We own the category. We’ll keep owning it because we have a franchise now.
C) Whatever…we just look at the “best of” and emulate it.

4. Our team
A) We’re so hungry to win, we’ll do it.
B) We have a playbook of competitive scenario plans in place; they only need to be implemented should warning signs appear.
C) We’re panicked. I think half the team has their resume on LinkedIn.

5. Our design model
A) Our engineers are adaptive and able to come up with products linked to customer affinity.
B) Our engineers have had several wins—we’re waiting for another right now.
C) Our engineers won’t look at anything Not Invented Here (NIH), and they all went to the C.O.P.Y. school of design.

6. Our business model
A) We keep fresh by bringing in best-of-breed resources.
B) We don’t want to outsource our brains to anyone. We should have best-of-breed people in house.
C) We don’t have a business model—we wait for business to come to us.

Give yourself 10 points for every A answer, five for every B, and zero for every C.

50–60 points: Celebrate for a couple of hours, then get back to business.
30–50 points: Too much pride involved. Think back to when you were young and striving, then come into work tomorrow and do it again.
0–30 points: You already know the answer—you don’t need me to tell you.

Categories: Go-to-Market Strategy Leadership
Nilofer Merchant

Nilofer Merchant

Nilofer Merchant is an advisor, writer, conference speaker and the CEO and founder of Rubicon Consulting, a strategy and marketing consultancy designed specifically for the needs of tech companies. She and her team have launched nearly 100 products, created five development platforms, designed 18 channel vendor programs, run numerous user influencer marketing initiatives and defined more than 30 new markets. To contact Nilofer, visit her blog, www.winmarkets.com or e-mail her at nilofer@rubiconconsuloting.com.

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