The Invisible Competitor: When Creating Value is Better than Fighting for It
Competing vs. Creating. Not all problems have solutions. Preferences meet Pitons.
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Intro.
“When people compete, somebody loses. So go where you're the only one. Do what only you can do. Run a race with yourself.”
– Peter Thiel
If you were taking a test and didn’t know the answer, you might cheat and look at how someone else was answering.
However, by virtue of the fact that you are copying, you will never be creating.
Bad companies are much like these cheating students.
They focus too much on the competition, which forever forsakes them to compete.
The competition businesses forget about is the competition against themselves. This is the student who takes a test not for the best score in the class, but to do the best they can.
But how does that actually look in business?
If You Can’t Compete for Customers, Create Them.
The biggest mistake competitors make is not knowing whether they are competing against a similar service, iterating on a well understood preference, or if they are offering something entirely new, revealing a consumer's latent preference for something that they’ve never seen.
PC makers traditionally competed on pricing and specs like processor speed, RAM, and graphics. Then Apple came along and revealed that the vectors of competition PC makers were competing on could easily be usurped by focusing on design, seamless integration, and it "just working". PC makers were stuck iterating on preferences that weren’t of high value to consumers.
Amazon competes on selection, delivery speed, price, and convenience. However, if a consumer decides they don't care about fast shipping and instead cares about saving the most money, or perhaps more out of left field, they say they care about a “carbon-free” supply chain, then Amazon is trying to win business from an inferior position because those factors are not what they are optimized to iterate on.
If Temu offers consumers super cheap goods, but they will take 10 days to be delivered and a consumer is okay with that, Amazon cannot easily address that threat because they can't un-invest the $200bn they spent in building out a logistics operation for fast delivery.
Etsy has indisputably the best marketplace for handmade items. The problem? Most people don’t have a strong preference for “handmade” and instead value quick shipping, cheaper prices, and convenience. No matter how well run Etsy is, they will never be able to fully optimize for these other vectors as long as they are “handmade”. This is because by virtue of being handmade, items aren’t stored in warehouses and cannot be as low cost as mass-manufactured goods. This is not a solvable problem.
(Keen readers may recall this point is similar to our memo on Pitons—A Piton, named after the metal mountain climbing tool that a climber stakes into the mountain and suspends themselves from, is both simultaneously an enabler and limiter. Etsy’s focus on handmade is both a critical aspect that differentiates their business but also simultaneously constrains them).
For Etsy, handmade is a decision that will constrain their ability to improve on other consumer preferences. So long as handmade isn’t a high priority for consumers, Etsy will always face adoption friction because their value prop doesn’t match what mass consumers want. (Of course, there are some consumers that highly value handmade and idiosyncratic selection, but the number of customers who value that more than ease of finding items, fast delivery, cheaper prices, and convenience are relatively few. You also may have different preferences for different purchases).
Pick Carefully.
Competition happens on two layers: 1) on the value prop that a company offers—this would include making the service as great or cheap as possible or 2) on finding different preferences that consumers value.
A retailer could have the nicest store, in the best location, with the best and cheapest merchandise, but if it turns out that consumers don't care about any of that as much as not having to go to the store in the first place, then even a mediocre ecommerce offering could win out.
Before Price Club and Costco, no retailer would have ever dreamed a customer would be okay with shopping in a barren warehouse and pulling racks of merchandise off industrial stock shelves. It turned out that customers didn’t mind because what mattered more to them was getting the best value possible. This makes sense in retrospect, but it was quite the surprise at the time (to everyone other than Sol Price).
The way companies are usually set up is they pick a variety of preferences that they think matter the most and then try to do the best with those preferences. However, if it turns out they picked incorrect preferences, or if consumers preference something else more, their existing offering is no longer competitive.
Imagine you are hungry but feeling very lazy. Your preference to have food delivered to you may take precedence over the food being even very tasty or cheap. A restaurant simply cannot win over the hungry but lazy customer with better tasting food at a better price—they will always lose because that is not what the customer preference is in that purchase.
Thus, companies have two general sets of competition: 1) The competition that they get from peer competitors iterating on the same value prop (a value prop is a group of preferences), or 2) the "competition" they get from consumers preferencing different items.
A surprising number of companies miss this basic distinction. When Chipotle had their E.coli scare, they started offering two for one burritos to boost sales. Of course, that didn't work because customers were concerned about getting sick eating there, not the price or quantity of food they would receive. Chipotle was focusing on the wrong set of preferences.
Reframing Disruption.
Under this framework, what is truly disruptive becomes very clear. Disruption does not fulfill existing preferences better but fulfills a latent preference that the incumbent’s product missed. Apple products are great because most PC manufacturers missed that consumers care about the design and feel of the product. It turned out that people cared so much about that that they were willing to pay more and even trade off some performance for it. This is also why Apple consumers are unconvinced when Samsung talks about a superior camera or processing power—by and large these are lower priority preferences for them.
Now there is a second important aspect to disruption and that is whether the business can serve these newly revealed consumer preferences from their existing organization, or if they need to reconfigure in order to have a competitive product—that is of course assuming they want to go after this new market at all.
From our first Piton Network Memo:
Think of Wal-Mart trying to fight Amazon’s one day delivery from a store footprint instead of a distribution center network. Their delivery position is clearly sub-optimal as their warehouses are oriented to delivering large full truckloads to individual store bays and not picking & packing single items into individual boxes. This leaves them to service delivery from the store level, with little of the automation or order density Amazon benefits from at each distribution center. They simply cannot address fast delivery on millions of items from a value network optimized for physical retail: their delivery network will always be sub-optimal relative to Amazon.
A metaphor on this is:
If you are a baker, it is the difference between making the best cake and making the best cake using the ingredients you happen to have laying around on your shelf.
You are optimizing for the variables you have versus the optimal variables to optimize for.
Wal-Mart is trying to “bake” fast delivery while utilizing the ingredients it already has in its cupboard.
(The Clay Christensen definition of disruption is when the incumbent doesn’t go after the upstart because they continue to have a much superior product on pre-existing, “traditional” preferences and are fine ceding the new market to the upstart since they see it serving different preferences. Under his definition, the instances when innovation is disruptive is when serving these new markets eventually leads to enough process improvements that this upstart can address the traditional preferences as well. Smaller disk drives, which initially had very inferior specs to the traditional mainframe computer, to only later become more powerful is a classic example of this.)
Pick the Right Mountain to Climb.
The decisions a company makes when they originally formulate a product are decisions that are hard to undo. A company creates a value prop, which is a group of different preferences. They may be able to change some of those preferences by changing parts of their organization later on, but by and large the key preferences are set—like handmade for Etsy, bulk quantities for Costco, or fast food for McDonald’s.
When a company embarks on a particular value prop, they will then optimize their entire business around serving that value prop. This allows them to fully optimize for those sets of preferences, but it also means that addressing other preferences will be much harder. This is because in order to fully serve a preference, the business will have to make decisions that will be hard, if not impossible, to change later on (one-way door decisions).
Readers may recall from our second Piton Network memo:
A Piton is a decision that both enables and limits an aspect of the business.
The Piton Network is all of the Pitons that support and limit a business.
How an organization is optimized today is based off of their existing network of Pitons.
– From our Second Memo on the Piton Network
Etsy, Costco, and McDonald’s are all optimized for their value prop, but with varying degrees of success. It is key to understand that this isn’t necessarily because of how competent the organizations are at optimizing, but rather because of what they decided to optimize for.
In contrast to what you might believe, Etsy is a pretty well-run organization. Their problem is that people don’t care enough about what they are good at. In contrast, people love Costco because what they are good at is exactly what people want.
When you compete with competitors, you are trying to optimize for the same value prop better than them—think Costco vs Sam’s Club or McDonalds vs. Burger King. Costco tries to have better products at better prices and in more location versus Sam’s Club, while McDonald’s fights Burger King with higher value-for-money meals, taste, and convenience.
Etsy though doesn’t have any director competitors. There is no one that specializes in homemade items that has anywhere near the scale of sellers or selection they have. However, this is only a strength to the extent that consumers care. It is sort of like the cliché rural town that has the largest of some item that no tourist actually cares much about. (Sorry, Casey, Illinois—the city known for having the largest objects in the smallest town…)
It is this sort of competition between different preferences that is often forgotten. And furthermore, it is actually the only “competition” that matters because if you succeed in fully optimizing for what your customers want, then you don’t need to worry about direct competitors.
In fact, it is often the mark of a poor company if they obsess over competition because when you are already optimizing for what your customers want, then there is nothing to do in response to competition.
Square Co-Founder Jim McKelvey made this point when Amazon launched a very similar product to their card reader.
Each Square director was given the opportunity to suggest potential countermoves, and after the last idea was considered, we reached a remarkable conclusion. In response to an attack from the most deadly company on the planet we would do nothing. Precisely nothing.
– The Innovation Stack by Jim McKelvey
Great companies focus on optimizing for their consumer preferences as much as possible. Being stuck in the mindset of responding to competition almost definitionally means that you weren’t doing that before. The reason for this is simple: if you are already doing everything you can possibly do to serve your customers, then there is nothing more to do when a competitor comes along.
When You Learn from Competition.
There are instances where a company can learn from competition though. This isn’t a contradiction because what a business is doing in this situation is incorporating new information about consumer preferences into their product that was revealed by a competitor.
The rise of fast casual salad places like Sweetgreen, Chopt, and Tender Greens revealed latent demand for fast and healthy food, which led to many fast food restaurants expanded their salad menus in response.
Five Guys and Shake Shack famously always served fresh, never frozen, burgers, which showed McDonald’s how important that preference was to consumers. In 2018 McDonald's started transitioning all of their US stores to fresh beef to address that consumer preference.
The rise of Chick-fil-A’s and Popeye’s fried chicken sandwiches showed many restaurants how popular the meal could be, leading many to launch their own fried chicken sandwiches as a result. KFC, Fatburger, Wendy’s, Jack in the Box, Sonic, Carl’s Jr., Shake Shack, McDonald’s, and Burger King all launched their own fried chicken sandwich. These menu “copy-cats” had learned from a competitor that people had a preference for fried chicken sandwiches. Each of them took this information and created a new item for customers, while wrapping it around their pre-existing value prop.
This shows that a business can adjust some of their offerings to different preferences as long as they are in their wheelhouse, but others—like McDonald’s serving salads and trying to be seen as healthy—are not possible without drastic changes to the organization. This is why McDonald’s ultimately stopped serving salads in 2020—there were many other venues that were serving those customers better. They still have fried chicken sandwiches and fresh beef though because that is something their organization was well-equipped to handle and it allowed their value prop to better match consumer preferences.
While it may seem like all of these fast food restaurants are competing against themselves, it isn’t true for a simple reason: your competitors will never be your customers. A competitor may influence what a customer comes to expect from a business, but sales are only won by providing more value to the customer than they value their money.
We started this piece by saying:
The biggest mistake competitors make is not knowing whether they are (1) competing against a similar service, (2) iterating on a well understood preference, or if they are (3) offering something entirely new, revealing a consumer's latent preference for something that they hadn't seen yet.
All three of these are about fulfilling consumer preferences, but how a business goes about it is different. In the first scenario, a company needs to differentiate by finding a new consumer preference to provide more value that isn’t easily replicated by a competitor (and thus resetting consumer expectations).
In scenario two, a company needs to focus more on their organization and come up with novel means to improve an product like a semiconductor manufacture figuring out how to add more transistors onto a chip. The preferences are well known by everyone, but the tricky part is the execution.
In scenario three, a business is creating something entirely new and convincing people that it is a product that they want, like the Ford Model T or the iPhone.
You win business by fulfilling consumer preferences. And the harder the preferences are for others businesses to fulfill, the more value you are creating and thus the more you can monetize.
Conclusion: Create, Don't Compete.
Ultimately, business is always about providing value to end consumers.
Competitors may give you an idea of how to provide value, but if you are stuck in competition, it is very unlikely you will be creating surplus consumer value.
Better than competing for value is to focus on creating it. The byproduct may be harm to a competitor, but that certainly is not the intention. The intention must always be to help provide value for consumers.
We will let Evolution's Chief Product Officer Todd Haushalter have the last word, where he makes the same point:
"It might sound simple but... I've been in companies where people love to talk about the latest industry gossip or what's going on, or what move did this company make or what move did that company make...
They'll ask me, 'Did you hear about this?'
'No, I didn't hear'...
We're looking at our players and we're looking at our partners."
-Todd Haushalter on the NEXT Podcast
Extra Credit.
If you recall from this piece on MVP (minimum viable products) and MPPs (maximum possible products), MVPs are a great way to see if a consumer preference exists. MPPs are a great way to prove to consumers that they have a preference they didn’t know about before.
MVPs allow consumer preference testing before committing your organization to it. These are like 2-way door decisions that can be easily reversed. In contrast, MPPs, by virtue of attempting to make the greatest possible product at the time, almost always mean you have committed the organization in ways that cannot be reversed. These are 1-way door decisions, or can also be thought of as load-bearing Pitons. Once Etsy decided to be a handmade marketplace and became popular because of that, they can never reverse that decision without essentially ripping apart the business.
(Read this piece for more on MVPs and MPPs.)
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Another great post. It helps us to go back to the principal ideas and understand the why. No wonder your full deep dives are 80-180 pages.))
Just re read it. Thanks Drew