One core belief of all growth-oriented startups is that the job to be done that they’re seeking to be hired for is insufficiently served by any existing competition. These startups tend to believe that they can achieve a level of excess profitability by either delivering a somewhat better solution in a much more efficient way (i.e. at lower cost) or by delivering such outsized value that they can charge a premium. In either case, they are attempting to innovate.
Innovation, in the sense of “disruptive innovation” from the work of Clay Christensen1, usually focusing initially on customers who have been underserved from large incumbents. They often times serve the customers at the lower end of this market (or in some cases, more niche areas of the market) because they can deliver value at a lower price (either through venture-based leverage or simply lower operational costs). Over time, as they prove out the value hypothesis with the initial cohort, they move up market into the higher paying customers or more broadly in the case of a niche underserved group.
If startups (and by analogy new products) are successful insofar as they successfully innovate over and against incumbent solutions to well-defined jobs to be done, then assessing the strength of an opportunity must include an analysis of the competition: what are their unique positions and where does their competitive power lie?
When seeking to understand the power that competitors might have, using a framework to analyze that power proves key. In 7 Powers2, Hamilton Helmer outlines specific ways that companies can create power defined as sustainable and long term free cash flow. For early stage companies, he outlines two power potentials that they can achieve: counterpositioning sets a company or product up as a clear alternative to less efficient or elegant ways of accomplishing a job to be done (think Chic-fil-a vs. McDonalds) and cornered resources where a company has unfair and protected access to a resource like raw materials or talent (a good example might be something like having a large number of PhDs in artificial intelligence on your team).
More established companies or products, however, are more likely to have one of the other powers established (if in fact they do have any power). A few of the obvious powers include economies of scale which commands increasingly high margin as the volume of distribution increases (think most SaaS companies or Netflix), network effects where the value of the product increases as the number of users/nodes on the network increases (think Etsy where the value increases as both more sellers and buyers join), and switching costs where the value of staying on a product or platform outweighs the value of a newer, better solution (think large IT systems and large-scale enterprise software).
Two additional powers that he describes are branding where a product commands a higher price simply on reputation (think Apple, Tiffany & Co, etc.) regardless of features or quality and process power where a particular process is so efficient and unique that it provides power (think Toyota’s manufacturing line or chip manufacturing). These two powers are harder to achieve in the world of software and so will prove less useful in evaluating competitors in that space.
While Helmer’s framework is helpful (and the above does little to show its full usefulness), any of several frameworks can prove helpful here (Michael Porter is certainly another useful and canonical theorist in the business strategy space3). In fact the more frameworks readily availble to analyze not only competition but one’s own business, the richer the analysis.