We’re used to competitions with clear winners
and losers: baseball games, math olympiads,
pie-eating contests, and games involving thrones.
We crown a victor and everyone else goes home
empty-handed [-- or when you play the game
of thrones, you win or you die.]
In business, though, there isn’t just one
winner.
In today’s world, there are very few actual
monopolies, or markets with a single seller.
Participation trophies actually mean something!
So as entrepreneurs, we have to take stock
in the middle of the competition, and ask
the question: “how competitive am I?”
Our competitors are more than happy to answer
this for us -- maybe not with words, but with
what they do.
So get ready, it’s time to study up on the
competition.
Are YOU up to the challenge?!
I’m Anna Akana and this is Crash Course
Business: Entrepreneurship.
[Theme Music]
I know what you’re thinking: time to break
out the cat burglar ensemble and do some light
corporate espionage!
Finally!
Well, let’s hold off for a second.
Movies like to show a cutthroat business world
with lots of men glaring out windows, surveying
their vast empires, and scheming to infiltrate
and destroy their competition.
But in real life, there’s way more to learn
from the competition than trade secrets.
I know.
I’m disappointed too.
I have a really piercing businessy glare.
Instead of spies or emperors, entrepreneurs
are more like scientists.
We come up with a hypothesis -- our business
idea -- and observe our environment to help
us make informed decisions.
A crucial part of our environment is our competition
-- the businesses or products that customers
might buy instead of ours.
Competitors and customers are both important
players in our market -- any structure that
allows buyers and sellers to exchange goods,
services, or information.
Not the same kind of market where you get
kale and frozen pizzas.
From competitors, we can learn standards for
doing business in our market, who our potential
customers are, and possible gaps in what’s
currently being offered where we could provide
more value.
But wait.
I thought you said this wasn’t cutthroat.
This sounds a lot like using the competition
to get ahead…?
I mean, it sort of is.
But we’re not being shady or unethical about
it.
We’re NOT trying to destroy everyone who
dares to make a product or service similar
to ours.
We want to learn all we can so we have the
best chance of being profitable -- that’s
the ultimate goal, right?
To make money doing something we love while
making the world a better place?
And to do that, our business must be competitive,
and we have to do this research.
Plus, nemeses are having their cultural moment
-- or at least a Twitter moment.
Comparing ourselves to other people can definitely
make us feel insecure, but these days, people
are using their foes as fuel for more innovation.
This special kind of competitor can push us
to work harder on our ideas, even if they
have no idea who we are.
Not to mention, our competitors are just as
curious about us.
I might be someone’s nemesis and not know
it!
So let’s start with the first thing we can
learn from our competitors: market standards.
We have to work smart, not just hard, so take
note of what they’re doing.
They’ve set price points, created marketing
campaigns, contracted with suppliers, and
already have customers.
Straight-up copying is illegal, and sure,
not everything will work for your specific
business.
But gathering this information can give you
an idea of industry standards.
Pricing is especially tricky.
It’s common to underprice products when
you’re starting out, but hey, you need to
make enough to keep doing business.
And you don’t want to go to market with
a $100 pizza when everyone else is charging
$10.
Unless you’ve replaced cheese with gold.
But what monster would do that?
Or if you notice that someone is wildly overcharging
for their service, your calculations may show
that you could charge less and still make
a tidy profit.
Down the road, paying attention to your competition
can also tip you off to the winds of economic
change.
Have they slashed prices or rolled out several
new products?
Have they rebranded?
Have they merged with a related company?
All of this information reflects what customers
currently want from your market.
Besides what customers want, our competition
can also tell us who potential customers are.
We know how important it is to talk to our
potential customers.
So if you’re at a loss for who might buy
your product or where to find them, start
with your competition.
You might find key demographics from public
data, like marketing on their social media
channels and website.
Or look at reviews on Amazon or Yelp -- customers
are telling us all the time who they are and
what they like!
They’re laying out what gains they want
and what pains are still frustrating.
If you still can’t find what you’re looking
for, try going straight to the source -- which
is about as close to corporate espionage as
we’ll get.
Call a non-competitive, similar business in
another state or city so you can ask them
slightly deeper questions like “Why did
you price your product this way?” and “What
is your biggest target market?”
Or go visit a physical establishment and pay
attention to the other customers and the overall
atmosphere.
Is the place full of angry old ladies, or
mild-mannered Wall Street brokers?
What time is it busiest?
What is their customer service like?
Once we have a sense of what our competitors
are doing, it’s just as important to consider
what they ARE NOT doing or what problems they’re
having.
Those are the gaps in the market.
There might be 100 burger restaurants in your
town, but none of them offer vegetarian options
and gluten-free buns.
Hello, that's a gap! I need it!
There might be 3 electric scooter rental companies
operating downtown, but none on the university
campus.
That's a gap!
There might be dozens of dog-walker fliers
in the community center, but none of them
send pictures and walk reports.
Gap! Huge one! Pet owner here, believe me!
When we talk to customers to understand their
jobs, pains, and gains, we need to understand
what they’re currently buying to make sure
our business isn’t more of the same.
We want to offer something valuable and unique
that meets customer needs.
In other words, we want to differentiate our
product.
Now to really help our business stand out,
we need to understand the two key forms of
competition: direct and indirect.
Direct competition is when different businesses
offer similar products or services to a wide
variety of customers.
Your local bookstore,
Barnes and Noble, and Amazon are all in direct
competition to sell you the latest fiction
gem. Like Hank Green's "An Absolutely Remarkable Thing."
Which will someday star me...
Customers consider lots of factors, such as
price, location, service, and products when
deciding where to buy their books.
But people have different preferences,
so everyone will probably choose different
combinations of those factors.
That’s why competition exists, and what
lets you find gaps!
The college kid down the block who shops local
may choose the independent bookstore, while
the errand-running parent goes to Barnes and
Noble, and the price-conscious retiree uses
Amazon.
In the end, they all get the same book.
On the other hand, indirect competition is
when a variety of products and services are
offered to the same customer base.
Bookstores aren’t just selling books, they’re
also selling enrichment and entertainment.
So indirect competitors of bookstores would
be other things people do to enrich their
lives or be entertained, like films, television,
video games, or board games.
Movies as a medium can be considered indirect
competition -- it doesn’t have to be a particular
business like a theater chain or streaming
service.
So competition is sort of a multi-dimensional
tug-of-war between businesses, and it’s
not easy to be competitive.
In 1979, business academic and author Michael
Porter wrote about competition in the Harvard
Business Review, and his insights are still
referenced today.
Porter’s 5 Forces is no Pride and Prejudice,
but it’s considered a business classic.
So it is a truth universally acknowledged
that there are five key factors you have to
balance to be a competitive business.The lower
these are, the better.
Like 5-hole mini golf.
Number one is supplier power.
How easy is it for your suppliers -- the people
who get you the stuff you need to run your
business -- to demand higher prices?
Supplier power is high if there aren’t very
many suppliers in the market, the product
you need is rare, the supplier is large and
you’re one of thousands of clients, or switching
suppliers is too expensive.
In all these cases, you’re sort of at the
mercy of their whims.
Number two is buyer power.
Can you choose your price, or are you constantly
trying to lure in buyers with sweet deals?
Buyer power is high if there aren’t very
many buyers in the market, each buyer is very
important to your business, or there’s a
low cost for the buyer to hop between you
and your competition.
Number three is threat of substitution.
Is anyone doing exactly what you’re doing?
When there are lots of close alternatives,
customers are more tempted to switch what
business they support if your prices increase.
So threat of substitution is high if changing
loyalties appeals to your customers’ wallets.
Number four is threat of new entrants.
Money attracts competition, so who else could
try to do similar things?
More competition means fewer profits for any
businesses currently in the market.
Barriers like patented technology or other
Intellectual Property, governmental red tape,
lack of access to distribution channels, or
expensive startup costs can prevent this.
But the threat of new entrants is high if
such barriers don’t exist.
And number five is competitive rivalry.
How many competitors do you have?
Rivalry is high if growth is slow across an
industry, getting out is hard, there are high
fixed costs (like rent, utilities, or insurance)
that drive price cutting, or if you have competitors
that don’t seem to sleep -- or literally
don’t need to, like A.I.
More competitors often means lower prices
across a market.
To see how Porter’s 5 Forces can measure
how competitive a business is, let’s go
to the Thought Bubble.
An enterprising young man named Tom was roughly
the size of an average, 13-year-old boy.
So he created a business called Rent-A-Swag
to rent his luxury clothes and accessories
-- like truly dope pocket squares -- to actual
13-year-olds.
But just how competitive is he?
Tom owns all of the merchandise he rents,
so he’s his own supplier and doesn’t have
to negotiate deals and relationships with
other distributors.
So Supplier Power is low.
There are lots of kids interested in cool
outfits and there are no direct competitors
to Rent-A-Swag in his community.
Indirectly, Tom competes with department stores
who sell luxury clothes and accessories, but
there’s a huge cost for buyers to switch:
a low rental fee is much more affordable than
the complete cost of these items.
So Buyer Power is low.
And as long as Tom keeps his rental prices
below the retail price of his indirect competitors,
customers probably won’t change loyalties.
So the Threat of Substitution is low.
Tom’s entrepreneurial success was because
his initial financial risk was relatively
low -- he owned all his merchandise and found
cheap real estate to rent -- and there were
few barriers to entry.
But that means there’s not much to stop
other people either, so the Threat of New
Entry is high.
And if a rival entrepreneur, like an OBGYN-slash-business
tycoon, starts the same type of business across
the street, customers would have no incentive
to stay loyal to Tom.
So Competitive Rivalry could be high.
So even though his business is competitive,
Tom isn’t sweeping the 5 Forces.
He needs to be aware of his weaknesses and
develop a plan to balance competitive rivalry
and threat of new entry if he wants to succeed.
Thanks Thought Bubble!
So basically, with more information, entrepreneurs
can make better decisions.
Learn everything you can from the competition,
and remember, in business there can be more
than one winner.
Next time, we’ll talk about the ins and
outs of making your business legal.
Thanks for watching Crash Course Business which is sponsored by Google.
And thank you to Thought Cafe for the graphics you saw.
If you want to help keep Crash Course free
for everybody, forever, you can join our community
on Patreon.
And if you want to learn more about competition
in market economies, check out this Crash
Course Economics video
